504 Macroeconomic Theory II, Part 1, Spring 2002

Economics 504, Part 1, Spring 2002

Princeton University

Courses 2001-02: 504 | 553 | 581f

504 Macroeconomic Theory II

Economics 504 is the second semester of an integrated two-semester sequence in macroeconomics, required for first-year Ph.D. students in economics. It assumes that students have already taken the previous semester of this sequence, Economics 503. As with Economics 503, the requirements of the course include attendance at the lectures, completion of a series of problem sets, a midterm, and a final exam.

Part 1 was taught by Lars Svensson. Part 2 was taught by Chris Sims.

Announcements regarding Part 1 will be made on this page, and the page will be frequently updated. Students are required to check the page regularly.

Final exam, Part 1 (questions 1 and 2), with answers
CDF of total point scores and grades

Part 1: Monetary Theory and Policy

The first half of Economics 504 in the Spring 2002 Graduate Program, Department of Economics, Princeton University.

Teacher: Lars Svensson, Office: 106 Fisher Hall, Tel: 258-0329, Email: svensson@princeton.edu.
Office hours: By appointment.
Administrative assistant: Kathleen DeGennaro, Office: 108 Fisher Hall, Tel: 258-7471, Email: kdegenna@princeton.edu.

Class schedule: Tuesday and Thursday, 10:40-12:10, Fisher B-06.
Part 1, with Lars Svensson, starts Feb 5 and ends Mar 14 (midterm on Mar 26).
Part 2, with Chris Sims, starts Mar 28 and ends May 2.

Preceptor: Giorgio Primiceri, Email: gprimice@princeton.edu.
Precept schedule: Tuesday, 5:00 pm.
Precept on Tuesday, Mar 12, moved to Friday, Mar 15, at 2:30pm.

Midterm: Tuesday, Mar 26, 10:40-12:10, Fisher B-06.
Midterm with answers. The midterm was 1.5 hours, corresponding to 90 points.
Final exam: Wednesday, May 15. The final exam will be 3 hours, corresponding to 180 points. Of the questions, 45 points will refer to part 1, 135 points to part 2.
Final exam, Part1 (questions 1 and 2), with answers
Final exam, Part 2 (questions 3-5), with answers
CDF of total point scores and grades

Prerequisites: Students are expected to be familiar with the material in Economics 503, Macroeconomic Theory I, taught by Robert Shimer and Noah Williams, in the Fall 2001 Graduate Program.

Requirements for part 1: Attendance at lectures and precepts, completion of a series of problem sets, submission of a list of typos in overhead slides, notes, and required readings, a midterm, and a final exam.

Overhead slides: Copies of overhead slides in the form of pdf files will be available before each class on this page. Students are expected to download and print these before each class.

Overhead slides 1
Overhead slides 2 (revised 2/13/02)
Note: The relation between stochastic nominal discount factors and Arrow-Debreu prices
Overhead slides 3
Overhead slides 4 (revised 2/19/02)
Overhead slides 5
Overhead slides 6
Notes on Optimization under Commitment and Discretion (revised 2/25/02)
Overhead slides 7
Overhead slides 8
Overhead slides 9
Overhead slides 10
Overhead slides 11

Problem sets The problem sets will be graded and have about 15% weight in the final grade for the course.

Errors: Please email me about any errors, for instance, in the reading list, the URLs or the overhead slides.

Readings and course plan

* indicates required reading. Other readings are suggested but not required.

Several of the topics that we shall take up are treated in two books, Obstfeld and Rogoff (1996) and Walsh (1998). These books are also good general references. Both books have been ordered and are available in the Princeton University Store. A good book on U.S. institutional detail is Mishkin (2000).

Students are expected to find most of the readings on the web. Learning to find your way to the monetary-policy literature on the web is part of the course. Use links to authors' personal homepages (this usually gives you the most recent copy), central bank's publications and working papers, NBER working papers, CEPR discussion papers, journals, JSTOR, the PU Library e-journals, etc. Some restricted material is available here.

1. Money and inflation

Cagan (1956).
*Obstfeld and Rogoff (1996, sec. 8.2).
Pearson (1990, sec. 19.2.1).
Sargent (1993).

2. An optimizing model of money demand and Friedman's rule

Friedman (1969).
Lucas (2000).
*Obstfeld and Rogoff (1996, sec. 8.3).
Svensson (1993).
Walsh (1998, secs. 2.3-2.5, 4.4-4.5).
Woodford (2002).

3. Evidence of real effects of monetary disturbances

Bernanke and Mihov (1998).
Christiano, Eichenbaum and Evans (1999).
Gali (2001).
Issing, Gaspar, Angeloni and Tristiani (2001, chap. 1).
*Walsh (1998, chap. 1).

4. The transmission of monetary policy: Aggregate demand, aggregate supply and expectations (2-3 lectures)

Blinder, Canetti, Lebow and Rudd (1997).
*Clarida, Gali and Gertler (1999).
Estrella and Fuhrer (1998).
Friedman (1968).
Gali and Gertler (1999).
*King (2000).
Lucas (1976, especially sec. 5.3).
*Mishkin (1995).
Sbordone (1998).
Walsh (1998, secs. 5.3-5.5).
Woodford (2001a).

5. A framework for analyzing monetary policy: goals, targets, indicators and instruments

Clarida, Gali and Gertler (1999).
*Söderlind (1999).
*Svensson (1999).
Woodford (1999).

6. Commitment and discretion in monetary policy

Blinder (1998, chap. 2, sec. 4).
Clarida, Gali and Gertler (1999).
Kydland and Prescott (1977).
McCallum and Nelson (2000).
*Söderlind (1999).
*Svensson (1997b).
Walsh (1998, chap. 8).

7. Policy prescriptions: The Taylor rule

Hetzel (2000).
*Taylor (1993).
Taylor (1999).
*Woodford (2001b).

8. Policy prescriptions: Inflation targeting

Bernanke, Laubach, Mishkin and Posen (1999, chap. 10).
Svensson (1997, 1999).
*Svensson (2001a, c).
Vickers (1998).
Woodford (2000).

9. Monetary policy in a liquidity trap

Clouse, Henderson, Orphanides, Small and Tinsley (2000).
*Krugman (1998).
*Svensson (2001d).

References

Bernanke, Ben S., Thomas Laubach, Frederic Mishkin and Adam Posen (1999), Inflation Targeting: Lessons from the International Experience, Princeton: Princeton Univ. Press.
Bernanke, Ben S., and Ilian Mihov (1998), "Measuring Monetary Policy," Quarterly Journal of Economics 113, 869-902.
Blinder, Alan S. (1998), Central Banking in Theory and Practice, MIT Press.
Blinder, Alan S., Elie R.D. Canetti, David E. Lebow and Jeremy B. Rudd (1997), Asking About Prices: A New Approach to Understanding Price Stickiness, New York: Russell Sage Foundation.
Cagan, Phillip (1956), "The Monetary Dynamics of Hyperinflation", in M. Friedman, ed., Studies in the Quantity Theory of Money, University of Chicago Press.
Calvo, Guillermo, Oya Celasun and Michael Kumhof (2001), "A Theory of Rational Inflation Inertia," Working Paper.
Christiano, Lawrence J., Martin Eichenbaum, and Charles L. Evans (1999), "Monetary Policy Shocks: What Have We Learned and To What End?" in Taylor, John B., and Michael Woodford, eds., Handbook of Macroeconomics, vol. 1A, North-Holland.
Clarida, Richard, Jordi Gali, and Mark Gertler (1999), "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature 37, 1661-1707.
Clouse, James, Dale Henderson, Athanasios Orphanides, David Small and Peter Tinsley (2000), "Monetary Policy when the Nominal Short-Term Interest Rate is Zero," Finance and Economics Discussion Series no. 2000-51, Federal Reserve Board.
Estrella, Arturo, and Jeffrey C. Fuhrer (1998), "Dynamic Inconsistencies: Counterfactual Implications of a Class of Rational Expectations Models," Working Paper no. 98-5, Federal Reserve Bank of Boston.
Friedman, Milton (1968), "The Role of Monetary Policy," American Economic Review 58, 1-17.
Friedman, Milton (1969), "The Optimum Quantity of Money", in The Optimum Quantity of Money and Other Essays, Aldine.
Gali, Jordi (2001), "Monetary Policy in the Early Years of EMU," Working Paper.
Gali, Jordi, and Mark Gertler (1999), "Inflation Dynamics: A Structural Econometric Analysis," Journal of Monetary Economics 44, 195-222.
Hetzel, Robert L. (2000), "The Taylor Rule: Is it a Useful Guide to Understanding Monetary Policy?" Quarterly Review, Federal Reserve Bank of Richmond, Spring 2000, 1-33.
Issing, Otmar, Vitor Gaspar, Ignazio Angeloni and Oreste Tristiani (2001), Monetary Policy in the Euro Area, Cambridge University Press.
King, Robert G. (2000), "The New IS-LM Model: Language, Logic and Limits," Federal Reserve Bank of Richmond Economic Quarterly 86/3, 45-103.
Krugman, Paul (1998), "It’s Baaack: Japan’s Slump and the Return of the Liquidity Trap," Brookings Papers on Economic Activity 1998(2), 137-205.
Kydland, Finn E., and Edward C. Prescott (1977), "Rules Rather than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy 85, 473-491.
Lucas, Robert E., Jr. (1976), "Econometric Policy Evaluation: A Critique," Carnegie-Rochester Conference Series on Public Policy, 1: 19-46. Reprinted in Lucas, Robert E., Jr. (1981), Studies in Business Cycle Theory, Cambridge: MIT Press.
Lucas, Robert E., Jr. (2000), "Inflation and Welfare," Econometrica 68, 247-274.
McCallum, Bennett T., and Edward Nelson (2000), "Timeless Perspectives vs. Discretionary Monetary Policy in Forward-Looking Models," NBER working paper no. 7915.
Mishkin, Frederic S. (1995), "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives 9(4), 3-10.
Mishkin, Frederic S. (2000), The Economics of Money, Banking and Financial Markets, 6th edition, Addison-Wesley Publishing.
Obstfeld, Maurice, and Kenneth Rogoff (1996), Foundations of International Macroeconomics, MIT Press.
Pearson, Carl E. (1990), Handbook of Applied Mathematics, 2nd ed., Van Nostrand Reinhold.
Rotemberg, Julio J., and Michael Woodford (1997), "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Macroeconomics Annual 1997, 297-346.
Rudebusch, Glenn, and Lars E.O. Svensson (1999), "Policy Rules for Inflation Targeting," in John B. Taylor (ed.), Monetary Policy Rules, University of Chicago Press, 1999.
Sargent, Thomas (1993), "The Ends of Four Big Inflations", in Rational Expectations and Inflation, 2nd ed., HarperCollins.
Sbordone, Argia M. (1998), "Prices and Unit Labor Costs: A New Test of Price Stickiness," IIES seminar paper no. 653, Stockholm University.
Söderlind, Paul (1999), "Solution and Estimation of RE Macromodels with Optimal Policy," European Economic Review 43, 813-823.
Svensson, Lars E.O. (1993), "Term, Inflation, and Foreign Exchange Risk Premia: A Unified Treatment," NBER Working Paper No. 4544.
Svensson, Lars E.O. (1997a), "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," European Economic Review 41 (1997), 1111-1146.
Svensson, Lars E.O. (1997b), "Optimal Inflation Targets, 'Conservative' Central banks, and Linear Inflation Contracts," American Economic Review 87, 98-114.
Svensson, Lars E.O. (1999), "Inflation Targeting as a Monetary Policy Rule," Journal of Monetary Economics 43, 607-654.
Svensson, Lars E.O. (2001a) "Inflation Targeting: Should It Be Modeled as an Instrument Rule or a Targeting Rule?" December 2001, European Economic Review, forthcoming.
Svensson, Lars E.O. (2001b), "Price Stability as a Target for Monetary Policy: Defining and Maintaining Price Stability," in Deutsche Bundesbank, ed. (2001), The Monetary Transmission Process: Recent Developments and Lessons for Europe, Palgrave, New York, 60-102.
Svensson, Lars E.O. (2001c), "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," working paper.
Svensson, Lars E.O. (2001d), "The Zero Bound in an Open Economy: A Foolproof Way of Escaping from a Liquidity Trap," Monetary and Economic Studies 19(S-1), February 2001, 277-312.
Svensson, Lars E.O., and Michael Woodford (1999), "Implementing Optimal Policy through Inflation-Forecast Targeting," working paper.
Svensson, Lars E.O., and Michael Woodford (2002), "Indicator Variables for Optimal Policy," working paper.
Taylor, John B. (1993), "Discretion versus Policy Rules in Practice," Carnegie-Rochester Conference Series on Public Policy 39, 195-214.
Taylor, John B. (1999), "A Historical Analysis of Monetary Policy Rules," in Taylor, John B., ed., Monetary Policy Rules, Chicago: Univ. of Chicago Press.
Vickers, John (1998), "Inflation Targeting in Practice: The U.K. Experience," Bank of England Quarterly Bulletin, November 1998.
Walsh, Carl (1998), Monetary Theory and Policy, MIT Press.
Woodford, Michael (1999), "Inflation Stabilization and Welfare," working paper.
Woodford, Michael (2000), "Pitfalls of Forward-Looking Monetary Policy," American Economic Review 90, 100-104.
Woodford, Michael (2001a), "Optimizing Models with Nominal Rigidities," manuscript.
Woodford, Michael (2001b), "The Taylor Rule and Optimal Monetary Policy," American Economic Review 91, 232-237.
Woodford, Michael (2002), "Price-Level Determination under Interest-Rate Rules," manuscript.

Courses 2001-02: 504 | 553 | 581f

Revised februari 16, 2006 .
Comments and suggestions are welcome.